Posted on 28 June 2008
By Mark Miller
The respected Employee Benefit Research Institute (EBRI) released new research this week that attempts to quantify how much more the average worker will gain through automation of 401(k) retirement savings plans at work. I wrote recently about the surging use of automated retirement portfolio management; the new EBRI study claims to be the first of its kind to quantify how a broader set of automated enrollment features will boost retirement saving across a range of income levels.
Automatic portfolio management means that new employees are defaulted into participation in 401(k) plans; it also means savings rates are automatically increased over time, and that contributions are placed into a default mix of investments appropriate for the participant’s age. All these changes were spurred by enactment of the Pension Protection Act of 2006 (PPA) as part of an effort to boost Americans’ retirement security.
EBRI found that the gains can be very significant. The analysis shows that workers currently age 25-29 participating in an automated plan would see an increase in portfolio value at age 65 of of 2.4 to 2.6 their final earnings. Here’s what that means:
Say you’re automatically enrolled in your employer’s 401(k) plan sometime in your 20s. Then, let’s say that you retire at age 65 with a final salary of $100,000 per year. EBRI calculates that your retirement account will be somewhere between $240,000 and $260,000 larger than if you hadn’t participated in an automated plan.